BLOOMFIELD HILLS, MI (TheStreet) -- A few short years ago, predictions of self-driving cars or autonomous driving systems prompted skepticism from all but the automotive engineers developing the technology.
No more. The reality of self-driving...

At the NVIDIA sponsored GTC 2015 (GPU Technology Conference) held last week, voice recognition demonstrations appear to have made the category a whole lot more interesting. It is safe to say that voice recognition and cognition has not changed...

NVIDIA Corp (NVDA) is a good candidate for a covered call at the $21.00 level. The Sep. '15 call at that price should fetch a credit of about $1.65, which means the entire position has a net debit of about $19.39. This trade has 3.04% downside...

Intel disclosed new technical details about its next-generation Xeon Phi processor to a small group of technology analysts-journalists at one of its Hillsboro sites this week. First revealed last year, the "Knights Landing" chip is expected to...

[at Barrons.com] - RBC Capital Markets chip analyst Doug Freedman this morning writes that chip maker Nvidia (NVDA), which makes no parts itself, appears to have moved some of its orders for making its chips from Taiwan Semiconductor Manufacturing...

In early trading on Wednesday, shares of Kraft Foods Group (KRFT) topped the list of the day's best performing components of the Nasdaq 100 index, trading up 32.3%. Year to date, Kraft Foods Group registers a 29.4% gain.

NVIDIA knows how to swing for the fences, and they did just that at this year’s GTC (GPU Technology Conference). At GTC 2015, NVIDIA CEO Jen Hsun Huang announced a multitude of new products, all of them having a very strong focus on Deep...

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NVIDIA (NYSE:NVDA) is the only publicly traded company that focuses exclusively on graphics chips. About 80% of the company’s graphics chips go into PCs, with the rest split between servers, handheld devices, and video game consoles. NVIDIA’s primary competitors are AMD and Intel, and NVIDIA and AMD each focus on building graphics chips for high-end products.

NVIDIA's long term growth is most threatened by competitors offering platforms that combine several chips using a central processing unit (CPU), operating system, and graphics processing unit (GPU). As a result, the growth of platforms is a major threat to NVIDIA’s core business. Intel released its Centrino platform for notebooks and AMD has a similar platform called Puma. But NVIDIA has tried to get in the game as well, building a platform for netbooks (aka Mobile Internet Devices) known as Tegra which competes head to head with Intel’s Atom platform.[1] However, NVIDIA is at a severe disadvantage to competitors AMD and Intel who have been developing an array of different chips for years, making the transition to platforms far more natural for them.

NVIDIA sells the vast majority of its chips to companies that make computers. It is dependent on a small number of these companies as NVIDIA's two top customers account for 25% of the company’s revenue, with its largest customer being Asustek (12% of revenue). NVIDIA and AMD share leadership in the graphics market, and this makes it difficult for NVIDIA to sign many long term contracts. However, NVIDIA does have one major deal with Sony to provide the graphics chips for its PS3 consoles. [2]

Business Overview

In 2009, NVIDIA generated a net income of $131.1 million on revenues of $982.5 million. This represents a 21.8% increase in net income and a 8.8% increase in revenus from 2008, when the company earned $107.6 million on $903.2 million in revenues.

NVIDIA produces chips and software that allow a computer to display complex moving images (for example movement in 3 dimensions). The following are the four main product segments along with their primary products:

Graphics Processing Unit (GPU): - 53.1% of revenue in 2009

GeForce are chips dedicated to personal computers especially for the purpose of gaming.

Consumer Products Business (CPB): - 4.9% of revenue in 2009

GoForce are like GeForce chips but are dedicated to handhelds and cell phones. The GoForce is used by both Motorola and Sony in their cell phones.

Professional Solutions Business (PSB): - 15.3% of revenue in 2009

Quadro chips are dedicated to business graphic solutions.

Tesla are high end graphic chips that are aimed at the supercomputing market. The supercomputing market is relatively small, but could potentially be a major market for NVIDIA.

Media and Communications Processor Business (MCP): - 26.2% of revenue in 2009

nForce are dedicated to integrating multifunctions and maximizing computer resource use (power, processing memory, etc.). The nForce was used in Microsoft’s Xbox console.

NVIDIA also creates customized parts in conjunction with other companies. These are sometimes integrated into the hardware of other companies, and sometimes allowed to stand alone. A customized chip is used in Sony’s next generation game console PS3. NVIDIA chips are used in Intel and AMD products as well.

Trends and Forces

Over 80% of Sales Come From the PC Market

NVIDIA gets over 80% of its sales from the PC market. NVIDIA is highly dependent on its PC customers, two of which make up 25% of the company's revenues.[5] The commoditization of PCs is one trend that could help gain even more business for NVIDIA. As PC makers try to differentiate themselves they have tried offering graphics chips as standard rather than a costly upgrade. As PC's become more advanced the market for high end graphics could grow as well especially if OEMs are making these chips standard parts.[6]

The video game industry is characterized by its evolving technology and its intense competition, primarily between Sony, Microsoft, and Nintendo. The trend in the industry seemed to be going towards better graphics and more complex gameplay, but the innovative approach of the Wii now puts that trend into question. The Wii does not have incredible graphics, but rather focuses on interesting and widely appealing gameplay. NVIDIA provides the graphics chip from the PS3 which had a focus on delivering very high level graphics, but so far sales for the PS3 have been lower than expected. A shift in the industry towards a Wii ideology could be potentially detrimental to NVIDIA's involvement in the industry. However, if Microsoft and Sony continue to go after better performance and more realistic graphics in their next generation consoles, then NVIDIA will benefit from that trend.

Short Product Cycles Creates Opportunities for Gains and Losses

Competitive advantages in a field as fast moving as graphics processing are tenuous and very short lived. A graphics chip product cycle here can last less than a year. Historically, NVIDIA and AMD/ATI have traded the lead in the high graphics market, often in the same year. Gamers and high end computer users are fickle and will jump to whoever wins the latest benchmarks. The huge R&D investments made by these companies makes it nearly impossible to consistently make the best chip year in and year out. However, loss of technology leadership means loss of competitive advantage for NVIDIA, and leads to drastically lower margins through lower revenues and increased R&D spending to catch up. NVIDIA has weathered multiple graphics chip generations and a crippling technology boom and bust cycle. It has emerged triumphant where a long list of competitors (3dfx, Matrox, S3, Creative) have left the industry or gone out of business because they could not keep up with product cycles or compete on price point.[7]

Competition

NVIDIA’s biggest competition is presently AMD which acquired NVIDIA’s old competitor ATI, the only other graphics company that also puts out high-end graphics chips. They also compete with Intel in the on-board and mobile video markets.

After years of having the definite upper hand, NVIDIA now has parity with AMD/ATI in the graphics market. Apple recently made the shift from NVIDIA to solely AMD/ATI for its desktop computers. NVIDIA won such high profile contracts as Sony's Playstation 3, while AMD/ATI has contracts for both Microsoft's Xbox 360 and Nintendo's Wii console.

Threat from Platforms

A potential advantage AMD and Intel have over NVIDIA is the ability to offer platforms. Platforms bundle some combination of chips doing different functions, for example, a central processing unit (CPU), operating system, or graphics processing unit (GPU). By bundling a graphics chip into the platform, Intel or AMD can offer its product in a more cost efficient and convenient way while at the same time eliminating the need to buy a separate graphics chip. This is a major threat to NVIDIA as its core business is to simply sell graphics chips. Intel's Centrino platform for notebooks has been quite successful because it offers a complete CPU, chipset, and wireless interface in one set of products. AMD has a notebook platform called Puma that is similar to Intel's platform, except has superior graphics capability. NVIDIA has released its Tegra platform which is a single chip computer (rather than the traditionally multi chip approach) aimed at handheld devices and mobile internet devices. The Tegra will compete directly with Intel's Atom platform. NVIDIA does not have a platform for PC's, but the Tegra is a step in that direction. However, even though NVIDIA has developed a platform, up until the Tegra NVIDIA has only developed graphics chips. AMD and Intel on the other hand have been developing an array of different types of chips for years, making their transition to platforms far more natural.

Competition

In the graphics chips world, NVIDIA's Major competitors are Intel and AMD (which recently acquired ATI).

In the high end graphics chips, NVIDIA’s major competitor is AMD. Both NVIDIA and ATI produce high end graphics chips. ATI’s main brand line (comparable to GeForce) was Radeon. Intel had plans to enter the high end graphics chips market with their "Larrabee" project, but those have been canceled.

Competition is more defined according to the ability to stay ahead of new technologies and being able to secure partnerships with other firms in the computer industry.